A Taste of Things to Come?

For the past couple of decades -- that is, during the parabolic phase of the
global credit bubble -- the financial markets have responded to US Fed announcements
of easier money like kids whose daddy has promised them a trip to Disneyland.
The euphoria doesn't always last, but the initial reaction is usually a credulous
round of applause and reflexive buying of risk assets. Go back through the
2008-2009 bear market and you'll see that even when the world seemed to be
falling apart, a Bernanke speech or a discount rate cut was good for a quick
pop in stock prices.

Which makes the past couple of days remarkable. The Fed promises more quantitative
easing -- this time via increased buying of US Treasuries -- and instead of
popping, the markets finish the day lower and open the following day down hard.

Could investors have finally figured out that they're being played by the
world's monetary authorities, and that our growing mountain of debt makes a
painless fix impossible? Maybe, but I'll go out on a limb and say no. The problem
with this latest stimulus program is that it isn't seen as big enough to offset
the slowdown that makes it necessary. The market is just waiting for the main
course.

The scam that is fiat currency will continue as long as those currencies are
in demand. While the US, Europe, and Japan can still borrow money, they'll
continue to do so, and continue to announce ever-larger stimulus programs aimed
at counteracting the mass liquidation of private debt.

So there's more coming. Much more. As the blog Pragmatic
Capitalistexplains, the "helicopter money" phase of hasn't even
started.

There is perhaps, no greater misunderstanding in the investment world today
than the topic of quantitative easing. After all, it sounds so fancy, strange
and complex. But in reality, it is quite a simple operation. JJ Lando, a
bond trader at Goldman Sachs, has eloquently described QE:

"In QE, aside from its usual record keeping activities, the Fed converts
overnight reserves into treasuries, forcing the private sector out of its
savings and into cash. This is just a large-scale version of the coupon-passes
it needed to do all along. Again, they force people out of treasuries and
into cash and reserves."

Some investors prefer to call it "money printing" or "stimulative monetary
policy". Both are misleading and the latter is particularly misleading in
the current market environment. First of all, the Fed doesn't actually "print" anything
when it initiates its QE policy. The Fed simply electronically swaps an asset
with the private sector. In most cases it swaps deposits with an interest
bearing asset. They're not "printing money" or dropping money from helicopters
as many economists and pundits would have you believe. It is merely an asset
swap.

Next year's stimulus plan will feature a panicked federal government buying
assets outright, for above market prices, with newly created dollars. That's
when we find out just how gullible the financial markets really are.

John Rubino is author of Clean Money: Picking Winners
in the Green Tech Boom (Wiley, December 2008), co-author, with GoldMoney's
James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday,
January 2008), and author of How to Profit from the Coming Real Estate
Bust (Rodale, 2003). After earning a Finance MBA from New York University,
he spent the 1980s on Wall Street, as a currency trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and
a frequent contributor to Individual Investor, Online Investor,
and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and GreenStockInvesting.com.